July Q&A

July 2nd 2021

Q. I am a builder, and my cash flow has been badly hit by the new reverse charge rules. This is largely because I am no longer being paid VAT by my builder clients to use as working capital until my quarterly VAT return is due. Is it possible to issue separate sales invoices for “labour” and “materials”, charging 20% VAT on the invoice for materials to help my cash flow?

A. The new reverse charge rules for the construction industry took effect on 1 March 2021 and transfer the VAT due on a supply from the supplier to the customer. The customer accounts for the reverse charge in Boxes 1 and 4 of their own return instead.

Unfortunately, the idea of separate billing for materials and labour does not change the reverse charge outcome. HMRC would still deem your work to be a single supply of a job that includes materials, i.e., all subject to the reverse charge. This situation would not change if you issued separate orders and contracts for the labour and materials, as HMRC would still treat it as a single “supply and fix” job.

Q. I joined the flat rate scheme in 2017. My business has two different activities that come within different scheme categories, so I have always apportioned my VAT between the two rates according to sales in that quarter. I understand this is incorrect and if so, what is the correct procedure and how should I correct past errors?

A. The scheme is intended to make VAT accounting simpler and to help achieve this aim, the legislation confirms that if a business has activities that fall into more than one trade category, it will make a single calculation based on the category that has the greater or greatest percentage of turnover. For example, if you ran a pub that had 60% drink sales and 40% food sales, you would apply the rate for “pubs” rather than “catering” to all of your takings. This is a good result because the percentage for pubs is lower than for catering supplies.

Your method needs to be corrected back to 2017 because this is less than the four-year correction period that applies to VAT errors. You might have over or underpaid VAT, depending on the numbers. If the net amount of the error is less than £10,000, you can include it on your next VAT return. Otherwise, you should make a separate disclosure to HMRC.

Q. I have formed a limited company which has purchased the freehold of a ten-year old commercial building. I have not decided what to do with the building but is it worth registering the company for VAT so that I can claim input tax on the solicitor’s fees linked to the purchase, which were considerable? I haven’t made an option to tax election on the building.

A. It seems that you were not charged VAT on the purchase of the building, which is good news. However, the opportunity to register for VAT and claim input tax on legal fees depends on what your company intends to do with the building. If you intend to rent it out, then you can register for VAT if the company submits Form VAT1614A to HMRC when you register, i.e. opt to tax the company’s interest in the building so that all future income will be taxable rather than exempt. However, an option to tax election lasts for 20 years before it can be revoked, meaning a potential VAT charge on renting, or selling it to a tenant or seller that cannot fully claim input tax. It might be worth sacrificing the input tax on the legal fees, rather than commit the company to an option to tax election that will have long-term implications.


John Craig, Associate